Week 5 Flashcards
(12 cards)
📁 Q: What are the main types of audit evidence and what do they involve?
A:
1. External Confirmations – Evidence obtained directly from third parties (e.g., banks, customers) confirming balances or terms; highly reliable due to independence.
2. Documentary Evidence – Written records such as invoices, contracts, and bank statements; can be internal or external — external is more reliable [anytime there is reliance on internally-generated company documents, the evidence type is documents]
3. Verbal (Oral) Evidence – Responses from management or staff during inquiries; less reliable unless corroborated by documentation.
4. Management Representations – Written assertions from management (e.g., representation letter); useful but lowest reliability — used to confirm or clarify, not substitute evidence.
5. Physical Evidence – Auditor’s direct inspection of assets (e.g., inventory counts, equipment); strong evidence for existence, but not valuation.
6. Electronic Evidence – Data stored or transmitted electronically (e.g., system reports, emails); reliability depends on controls over IT systems.
7. Computational Evidence – Evidence generated through recalculation or reperformance (e.g., interest or depreciation calculations); highly reliable as it’s auditor-generated.
🔒 Q: What factors affect the reliability of audit evidence?
A:
1. Auditor’s own direct observation or testing
2. Independence of the source
3. Strength of the client’s internal controls
4. Qualifications of the information provider
5. Objectivity of the evidence
6. Consistency across multiple sources
📊 Q: What does it mean for audit evidence to be sufficient?
A:
Sufficiency refers to the quantity of audit evidence obtained.
– The amount needed depends on the risk of material misstatement: higher risk = more evidence.
– It also depends on the quality of evidence: if evidence is weak, more is needed.
– Example: More confirmations might be required for a high-risk receivables balance.
🧾 Q: What are the five main audit assertions/objectives for balances (balance sheet)?
A:
1. Existence – Recorded assets, liabilities, and equity items actually exist at the balance sheet date; prevents asset overstatement.
2. Rights and Obligations – Entity owns the assets and is responsible for the liabilities; avoids misstating items held on behalf of others.
3. Completeness – All balances and disclosures that should be recorded are included; prevents omission of liabilities or assets.
4. Accuracy – Account balances are mathematically correct and properly recorded; includes recalculations and cross-checks.
5. Valuation and Allocation – Items are stated at appropriate values and any adjustments (e.g., provisions, NRV) are properly applied.
Q: What are the five main audit assertions/objectives for transactions (income statement)?
A:
1. Occurrence – Transactions recorded actually took place and relate to the entity; prevents overstatement (e.g., fictitious sales).
2. Completeness – All transactions that should have been recorded are included; prevents understatement (e.g., missed expenses).
3. Accuracy – Transactions are recorded at correct amounts with correct data; important for complex items like payroll or foreign exchange.
4. Cut-off – Transactions are recorded in the correct accounting period, especially near year-end; prevents income manipulation.
5. Classification – Transactions are posted to the correct accounts; ensures proper financial reporting (e.g., repairs vs. capital assets).
Q: What is the difference between positive and negative confirmations?
A:
Positive Confirmation – The third party must respond in all cases, confirming or disputing the information
Negative Confirmation – The third party only replies if the information is incorrect (less reliable)
Q: What is the most reliable form of audit evidence?
A:
Evidence generated externally and sent directly to the auditor (e.g., bank confirmations, legal letters)
Q: What are the auditor’s responsibilities when using an expert?
A:
1. Assess whether an expert is needed
2. Define and document the scope of the expert’s work
3. Evaluate the expert’s competence, capability, and objectivity
4. Review the expert’s findings and conclusions
5. Remain responsible for the overall audit opinion
Q: When is an expert used in an audit?
A:
When the auditor lacks the technical knowledge or qualifications to assess a complex or specialized item (e.g., actuarial valuations, legal provisions, real estate appraisals).
🛠 Q: What are the primary audit evidence gathering techniques and what do they involve?
A:
1. Inspection (tangible assets or documents) – Examining records, documents, or tangible assets to verify existence, accuracy, or compliance (e.g., contracts, invoices, inventory).
2. Inspection
2. Observation – Watching processes being performed by others to assess how controls operate (e.g., observing inventory counts).
3. Inquiry – Asking questions of knowledgeable personnel (management, staff, legal counsel); needs to be corroborated with other evidence.
4. Confirmation – Obtaining direct verification from independent third parties (e.g., bank balances, receivables); highly reliable.
5. Recalculation – Checking the mathematical accuracy of documents or records (e.g., depreciation schedules, payroll).
6. Reperformance – Independently executing procedures or controls to validate how they were performed (e.g., re-performing a bank reconciliation).
7. Analytical Procedures – Evaluating relationships and trends in financial or non-financial data to identify anomalies or inconsistencies (e.g., comparing gross margins to prior years).
🎯 Q: What does it mean for audit evidence to be relevant?
A:
Relevance refers to how well the evidence relates to the specific audit objective or assertion being tested.
– Relevant evidence directly supports or contradicts what the auditor is trying to prove (e.g., existence, completeness).
– Evidence must align with the timing, nature, and scope of the item being tested.
– Example: To test cut-off, sales invoices dated just before and after year-end are more relevant than invoices from mid-year.
Rank the Reliability of Evidence-Gathering Procedures
